New Year’s party? Hardly.

Thursday, October 25, 2012

It’s time to plan for a New Year’s Eve party if you’re a shipper. Not in the mood for celebrating? Why’s that?
Is it because the carrier members of the Transpacific Stabilization Agreement are intent on pushing through a hefty rate increase on eastbound shipments from Asia to North America on Jan. 1? To be specific, the increase is $800 per FEU to the West Coast, $1,000 to the East Coast and $1,200 for intermodal shipments.
Or might you be in a sour mood because Maersk Line has announced it is raising reefer container rates by 30 percent — a whopping $1,500 per 40-foot box on average — on New Year’s Day, and other lines are likely to follow suit in some way?
Or is it because the master contract for U.S. East and Gulf coast longshore labor is now due to expire Dec. 31? You know, the contract shippers had to fret about all spring and summer, only to have the uncertainty prolonged another three months?
Not to mention that carriers are likely to re-file for permission to assess port congestion fees from Jan. 1 if the International Longshoremen’s Association and their employers can’t agree on a new contract, potentially shutting down ports from Maine to Texas.
This is obviously a worst-case scenario. But imagine if you’re a midsized shipper waking up on Jan. 1 and you’re confronted with a $1,000 congestion fee and an $1,200 intermodal cargo rate increase on your U.S. inbound shipments. All while the East Coast ports are shuttered, congesting U.S. West Coast ports. Hooray for 2013!
On a more serious note, each individual move is probably justifiable. TSA members have been urging one another for some time to hold a line on transpacific rates, and the increases proposed for Jan. 1 are meant to blunt the impact of an unhealthy dynamic — where discounted rates for certain specific routes or commodities become a sort of baseline for all rates on the trade.
“Rates negotiated for one route or commodity too easily go viral, spreading to all routes and commodities,” said TSA Executive Administrator Brian Conrad. “That may often be the nature of markets, but it does not necessarily mean those rates are anywhere near economically sustainable for lines carrying the cargo.”
Setting the rate bar higher prior to spring contract negotiating season is not new, but the delta of the increase, coupled with all the other sparks that could fly on Jan. 1, means the proposed increase likely won’t go down well with shippers.
Have the mechanics of the trade changed sufficiently for carriers to successfully argue with their customers that a 30 percent increase in base rates is justified? Not to suggest that carrier-operating costs haven’t materially increased and that they need rates to go up. But if I’m a shipper and I’ve been paying decent rates (not rock bottom rates), I need to know what has changed if my service provider knocks on my door asking for a 30 percent increase overnight.
As discussed in this issue, Maersk made a tough decision for its refrigerated container business. The concept is simple: pay more or go elsewhere. Again, a justifiable move, even if Maersk, as a market leader in reefer container shipping, was as culpable as anyone for letting rates slide and stagnate to what they now deem unviable levels.
And then there’s the ILA contract and potential port shutdown. Reason triumphed in mid-September, when a federal mediator announced the sides would extend the contract deadline three months until the end of 2012. The move has bought both sides time to bridge their seemingly vast divide, while also taking the issue off the table ahead of the looming presidential election.
So while shippers who suffered through six months of worry about how a work stoppage might affect their supply chains could breathe a sigh of relief that the peak season would be unaffected, they should now also be expecting the sides to come to a conclusion well in advance of the new deadline.
The confluence of these major announcements on one date perpetuates the perception that shippers are left on the sideline when the issues that impact their businesses are decided.
There are, of course, major shipper organizations that keep their finger on the pulse, but there’s precious little coordination when it comes to blasting shippers with news that their cost structures could change significantly overnight.
So while we’re all watching the ball drop New Year’s Eve, shippers will be wondering how all this got dropped on them.